DJIA Hits Another All-Time High on Diminishing Inflation Worries, Lower Oil Prices and More Optimism in Housing Sector

Indices
S&P 500 1,393.22 +.64%
DJIA 12,218.01 +.71%
NASDAQ 2,430.66 +1.01%
Russell 2000 785.06 +1.64%
Wilshire 5000 13,971.84 +.73%
S&P Barra Growth 646.12 +.77%
S&P Barra Value 745.00 +.50%
Morgan Stanley Consumer 671.50 +.35%
Morgan Stanley Cyclical 871.72 +.38%
Morgan Stanley Technology 576.03 +1.36%
Transports 4,764.73 -.20%
Utilities 450.14 +.21%
Put/Call .82 +3.80%
NYSE Arms .95 +15.81%
Volatility(VIX) 10.50 -3.31%
ISE Sentiment 135.0 -6.90%
US Dollar 85.24 -.15%
CRB 308.43 +.13%

Futures Spot Prices
Crude Oil 58.35 -.39%
Unleaded Gasoline 154.30 +.39%
Natural Gas 7.98 +1.15%
Heating Oil 166.67 +.40%
Gold 621.70 -.58%
Base Metals 236.69 +2.76%
Copper 312.40 unch.
10-year US Treasury Yield 4.57% -.89%

Leading Sectors
Homebuilders +3.49%
Semis +2.83%
Retail +2.29%

Lagging Sectors
Steel +.16%
Coal -.10%
Gold & Silver -1.07%

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Afternoon Recommendations
Oppenheimer:
Rated (JTX), (MGRC), (ARP), (WLSC) and (SRCL) Sector Outperformers.

Afternoon/Evening Headlines
Bloomberg:
- President Bush, meeting with the heads of the big three US auto companies, said the industry remains crucial part of the US economy and the government and automakers share common concerns.
- Shares of Dillard’s Inc.(DDS) rose to their highest in 26 years after it posted an unexpected third-quarter profit that beat analysts’ estimates.
- Analog Devices(ADI), whose semiconductors are used in products ranging from mobile phones to cars, said fourth-quarter profit doubled as costs declined. The shares surged 6% in after-hours trading.
- Using radiation therapy to fight cancer that remains after the removal of the prostate gland appears to reduce the risk that the disease will come back and extends a patient’s lifespan, a study found.
- Federal Reserve Bank of St. Louis President William Poole said the central bank’s interest-rate stance is “about right.”

Nikkei English News:
- Nintendo Co. will ship nearly 400,000 Wii video-game consoles to retailers in Japan for the machine’s Dec. 2 release.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semi longs, Medical longs and Retail longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, almost every sector rose and volume was above average. Measures of investor anxiety were mostly higher into the close. Today's overall market action was very bullish. Homebuilders, Retailers and Tech paced today's gainers. Commodity stocks lagged throughout the day. The Saudi Tadawul Index fell another 5% today and is testing recent lows. Comex copper inventories surged another 4% and are near nine-month highs. Pension and other investment funds poured $110 billion into commodity indexes over the last 12 months, double their 2005 investment, according to a recent American International Group report. Notwithstanding this record infusion of capital and numerous potential upside catalysts, the CRB Index is down 2% over the last year, down 7% year-to-date and down 16% over the last six months. I continue to believe most commodities will fall to levels recently thought unimaginable during the next substantial global downturn. The 10-year yield fell another 4 basis points today after the PPI matched its largest monthly decline in U.S. history. I expect stocks to build on today's gains through week's end on less political uncertainty, diminishing inflation worries, rising holiday spending optimism, lower energy prices, seasonal strength, strong corporate profits, investment manager performance anxiety and short-covering.

DJIA Making Another New All-Time High into Final Hour on Three Stunning Developments

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Retail longs and Internet longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive as the advance/decline line is higher, most sectors are rising and volume is above average. Three stunningly positive developments for the broad market occurred today. Here is a summary:

1. The world has three times more recoverable oil than previously thought, according to Cambridge Energy Research.
2. The PPI fell 1.6%, matching the largest monthly decline in U.S. history. The Core PPI fell .9%, the largest monthly decline in 13 years.
3. Homebuilder DR Horton (DHI) beat consensus 4Q earnings estimates by .58/share or 84%. They exceeded revenue estimates by $850 million.

Just a few months ago, most investors believed the imminent occurrence of the hugely flawed "peak oil" theory was at hand, runaway inflation would send interest rates soaring and that a housing earnings beat of DR Horton's magnitude was impossible. The knee-jerk reaction to sell and short stocks this morning on the belief that a recession is looming will prove, once again, incorrect. I suspect GDP growth for the fourth quarter will exceed estimates of 2.5%, coming in around 3%, as the deflator subtracts less from growth than most expect. I suspect U.S. stocks have begun another meaningful push higher into year-end after a brief election digestion period. I expect US stocks to trade modestly higher into the close from current levels on short-covering, performance anxiety, lower energy prices, lower interest rates, more optimism and buyout speculation.

Today's Headlines

Bloomberg:
- The world has 3.7 trillion barrels of oil left, three times the estimates of geologists and analysts such a Matthew Simmons, of the investment bank Simmons & Co., who argue that global oil output is already close to a peak, according to a new report from Cambridge Energy Research, the consulting firm run by Danial Yergin. Cambridge said the “peak oil” theory is based on faulty analysis.
- Crude oil is falling a third day in NY as warm weather in parts of the US is reducing fuel consumption and a report states the world has three times more recoverable oil than previously thought.
- US Treasuries rose the most in two weeks after a government report showed wholesale prices matched their largest monthly decline in US history.
- Al-Qaeda groups are trying to obtain nuclear, chemical and biological material to use in terrorist attacks in the UK, the Foreign Office in London said.
- Europe’s economy slowed more than forecast in the third quarter and German investor confidence unexpectedly fell this month, weakening the case for further interest rate hikes by the ECB.
- The perceived risk of owning United Airlines parent UAL Corp.’s debt rose after a report that the company may be the target of a leveraged buyout, according to traders betting on the creditworthiness of companies in the credit-default swap market.
- Nymex Holdings, owners of the world’s largest energy market, increased the size of its initial public offering and raised the price range by more than 10% because of strong demand for its shares.
- Iran doubled its capacity to produce enriched uranium last month, defying UN Security Council calls for it to stop, the UN’s nuclear watchdog reported.
- DR Horton(DHI), the largest US homebuilder, said fiscal fourth-quarter profit fell less than analysts estimates and average selling prices rose. The shares surged 8.3%.
- Wal-Mart Stores(WMT) and Target Corp.(TGT) reported third quarter profits than exceeded analysts’ estimates on sales of food and toys.
- Men who put on weight in their 40s and 50s may not live into their 80s, a study found. Using tobacco and drinking too much also shortens lifespans.

Wall Street Journal:
- US Commerce Secretary Carlos Gutierrez and senior Chinese trade officials held talks Monday over access to the China market, product piracy, and complex government regulations.
- President Bush will focus on efforts to curtail Iran’s nuclear development program in private talks with Russian President Putin and Chinese President Hu Jintao.
- US Internet companies are asking the SEC to stop fee increases imposed by stock exchanges for displaying data from electronic markets, citing Markham Erickson, who heads NetCoalition.com, a trade group.
- TiVo Inc.(TIVO) will introduce new features that will let friends or family members share videos over the Internet for play on a television sets.
- Whole Foods Market(WFMI) has started selling a line of chips and a non-carbonated drink from PepsiCo(PEP), neither of which bears the parent company’s name on their labels.
- Delta Air has cut prices for seats on more than 10,000 domestic routes through the middle of next month.

NY Times:
- The US National Council of Teachers of Mathematics, which in 1989 said math education should let children explore problems rather than demand rote learning, has called for a return to basics.
- US evangelical Christians’ support for Israel has become a political force that will be hard to ignore.
- US county and local officials in at least nine states in the past year have imposed new restrictions on where and how long political signs can be erected.
- WildBlue Communications, Hughes Network Systems and Spacenet are among satellite providers that provide high-speed Internet service to rural customers who aren’t being served by phone and cable companies.
- The NYC Central Labor Council, which represents about 1 million workers in 400 local unions, will vote tomorrow on whether to admit the NY Taxi Workers Alliance as a member.

AP:
- KFC Corp. is overhauling its well-known Colonel Sanders brand logo as part of a plan to freshen its image.

NY Post:
- The American Heart Assoc. is opposing NYC mayor Michael Bloomberg’s plan to ban trans fat in restaurants. Prohibiting cooking oils containing trans fat, such as vegetable oil and shortening, could force restaurants to use animal fat or palm oils, which are high in saturated fat.

Algerie Presse Service:
- Algeria’s state-energy company Sonatrach found two new petroleum fields in eastern Algeria.

Xinhua News:
- China will establish police stations in each of the nation’s 700,000 rural villages to quell growing unrest, citing a security official. China’s current police force of 1.8 million isn’t enough to deal with the rising number of murders and assaults.

PPI Matches Largest Monthly Decline in US History, Retail Sales Excluding Gas Station Receipts Rise

- The Producer Price Index for October fell -1.6% versus estimates of a -.5% decline and a -1.3% decrease in September.
- The PPI Ex Food & Energy for October fell -.9% versus estimates of a .1% increase and a .6% gain in September.
- Advance Retail Sales for October fell -.2% versus estimates of a -.4% decline and a -.8% fall in September.
- Retail Sales Less Autos for October fell -.4% versus estimates of a -.2% decline and a -1.2% fall in September.

BOTTOM LINE: Prices paid to US producers fell 1.6% in October, matching the biggest monthly decline in US history, as energy costs and motor vehicle prices dropped, suggesting inflation pressures are abating, Bloomberg said. Excluding Food & Energy, the core rate fell .9%, the largest decline in 13 years. So far this year, producer prices are declining at a 2% rate, compared with a 6.4% increase in the first 10 months of last year. Core prices are rising at a .7% rate versus a 1.6% increase during the same period last year. Prices for passenger cars declined 2.3% versus a 2.8% increase in September. Food prices fell .8% versus a .7% rise in September. Costs of intermediate goods, which are used in the early stages of production, fell 1.1%. Prices for raw materials fell 10.5% and are down 22% since October 2005. As I said a number of months ago, inflation concerns have peaked for this cycle. I still expect the next move by the Fed to be a cut in the first half of next year as inflation continues to decelerate.

Retail sales in the US fell less than expected in October as increases in purchases of food and autos helped make up for a steep drop in gasoline-station receipts, Bloomberg said. Retail sales, excluding gas stations receipts, rose .4%. A healthy job market and falling gas prices continue to boost consumer spending. Sales at automobile dealerships and parts stores rose .6% last month versus a .7% increase the prior month. Filling station sales declined 6% versus an 11% decline the prior month. The average price of a gallon of gas was $2.24 in October versus $2.95 in August. I expect retail sales to exceed estimates this holiday shopping season as rising stock prices, a healthy labor market, lower inflation, low interest rates, rising consumer confidence and falling energy price offset the housing slowdown.

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Tuesday Watch

Late-Night Headlines
Bloomberg:
- Fidelity Investments sold most of its Yahoo!(YHOO) stake over the last four months as the stock fell.
- Japan’s economy grew at an annualized 2% in the three months ended Sept. 30, the Cabinet office said in Tokyo. Second quarter growth was revised to 1.5% from 1%.
- Drew Matus, a senior economist at Lehman Brothers(LEH) says US consumer spending may be accelerating.
- Sony Corp.(SNE) said its PlayStation 3 can’t play software titles designed for older consoles properly, marring the company’s launch of its newest machine after a shortage.

Financial Times:
- NATO advisers are warning the alliance needs to guard against attempts by Russia to create an “OPEC for natural gas” that would strengthen Moscow’s leverage over Europe. An economic study warned that Russia may try to build a gas cartel that would include Algeria, Qatar, Libya, the countries of central Asia and possibly Iran. Russia supplies 24% of Europe’s natural gas.

Guardian:
- The US government is lobbying UK ministers to allow the world’s largest drug companies unrestricted access to the UK’s National Health Service as it begins to adapt free-market reforms.

New Straits Times:
- Malaysia will more than double production of biodiesel next year, citing the Minister for Plantation Industries and Commodities.

Late Buy/Sell Recommendations
Citigroup:
- Reiterated Buy on (BEAS), target $18.
- Reiterated Buy on (LUV), target $19.40.

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 indicated +.02%.
NASDAQ 100 indicated -.03%.

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Earnings of Note
Company/EPS Estimate
- (ANF)/1.10
- (A)/.53
- (AEOS)/.65
- (ADI)/.40
- (BJ)/.26
- (DHI)/.69
- (FOSL)/.30
- (HD)/.75
- (PBY)/-.05
- (PPC)/.14
- (ROST)/.31
- (SKS)/.03
- (SCHS)/1.22
- (SPLS)/.36
- (SNS)/.27
- (TGT)/.55
- (TJX)/.46
- (WMT)/.60

Upcoming Splits
- None of note

Economic Releases
8:30 am EST
- The Producer Price Index for October is estimated to fall .5% versus a 1.3% decline in September.
- The PPI Ex Food & Energy for October is estimated to rise .1% versus a .6% increase in September.
- Advance Retail Sales for October are estimated to fall .4% versus a .4% decline in September.
- Retail Sales Less Autos for October are estimated to fall .2% versus a .5% decline in September.

10:00 am EST
- Business Inventories for September are estimated to rise .6% versus a .6% increase in August.

BOTTOM LINE: Asian indices are higher, boosted by technology and automaker shares in the region. I expect US equities to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the day.